The 129MWh battery, which is paired with a wind farm, is designed to improve the security of electricity supplies across South Australia.

On Friday the state’s premier, Jay Weatherill, confirmed the deal, which forms a key part of the government’s $550m energy plan.

The state government said Musk had confirmed his pledge made on Twitter in March that he could deliver the battery within 100 days of signing the contract or it would be delivered free.

Romain Desrousseaux, the deputy chief executive of Neoen, said that at 129MWh the South Australian lithium ion battery would become the largest in the world. The battery will be built near Jamestown, in the state’s mid-north, and will be paired with Neoen’s Hornsdale windfarm to provide stability for renewable power being fed into the grid.

Musk told reporters in Adelaide on Friday the project was not without technical challenges, given it would be the largest battery installation in the world “by a significant margin”.

“When you make something three times as big, does it still work as well? We think it will, but there is some risk in that,” he said. “We’re confident in our techniques and the design of the system.”

He anticipated it would help stabilise the grid and help bring down prices for consumers.

“You can essentially charge up the battery packs when you have excess power when the cost of production is very low … and then discharge it when the cost of power production is high, and this effectively lowers the average cost to the end customer,” Musk said. “It’s a fundamental efficiency improvement for the grid.”

Musk said a failure to deliver the project on time would cost his group about $50m, though the details of the contract have not been revealed.

The battery forms a key part of the state government’s $550m energy plan drawn up after last year’s statewide blackout. Weatherill said: “I’m thrilled with the selection of Neoen and Tesla, whose experience and world leadership in energy security and renewables will help South Australia take charge of its energy future.”

“Battery storage is the future of our national energy market and the eyes of the world will be following our leadership in this space.

“This historic agreement does more than bring a sustainable energy giant in Tesla to South Australia, it will also have some significant economic spin-offs.”

Repeated blackouts in SA since September have sparked a political brawl over energy policy, with the federal government blaming the failures on the use of renewable technologies. After the most recent blackout in early February the Australian Energy Market Operator said there were many factors behind it, including higher demand than anticipated.

Grid-scale battery storage could help to even out price spikes, prevent blackouts and improve reliability across the network.

The Climate Council’s Tim Flannery said South Australia was leading the charge on Australia’s transition to renewable energy and storage technology.

“South Australia is tackling climate change head-on and should be congratulated for its innovation and leadership as it transforms our energy system into one that’s clean, affordable, efficient and secure,” Flannery said.

“South Australians are witnessing first hand how swiftly this technology can be built and used, with the battery expected to be up and running this summer.

“South Australia joins the likes of California as a world leader in demonstrating how renewable energy and storage technologies can power our economy cheaply and cleanly.”

Flannery said the federal government should be encouraging further investment in energy storage to assist in building the renewable energy sector.

“Renewables like wind and solar are now the cheapest power source available. We need to roll out this technology swiftly in a bid to tackle climate change.”

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